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Summary

  • As we previously predicted on October 14, 2013, shares of Tesla Motors Inc. (TSLA), Equinix Inc. (EQIX) and Keurig Green Mountain, Inc. (GMCR) have appreciated substantially despite recent pullback.
  • Although short ratio (short interest/ float) has retreated for Equinix and Keurig, such ratio has actually increased for Tesla.
  • Despite a sizable recent pullback from February highs, this is a good opportunity to book profits and sell such shares while they are still up by an average of 28.98%.

On October 14, 2013, we published the article "3 stocks that can spike due to massive short interest", whereby we determined that despite extreme and exuberant valuations, three stocks with massive short ratio (short interest / float) in excess of 25% could yet spike higher, hence favoring buying such shares: Equinix Inc. (NASDAQ:EQIX) (which had short ratio of 28.45%), Green Mountain Coffee Roasters (NASDAQ:GMCR) (which had short ratio of 26.52%) and Tesla Motors Inc. (NASDAQ:TSLA) (which had short ratio of 26.21%).

Since the publication of our article, Equinix shares are up by 10.78% from $166.12 on October 14 to $184.02 on March 28, 2014, while they were up by as much as 18.11% at an intraday high of $196.20 on February 20, 2014.

Green Mountain Coffee Roasters shares, now re-branded as Keurig Green Mountain, Inc., are up by 56.85% from $68.95 on October 14, 2013 to $108.15 on March 28, 2014, while they were up by as much as 80.45% at an intraday high of$124.42 on February 20, 2014.

Finally, Tesla shares are up by 19.3% from $179.72 on October 14, 2013 to $214.41 on March 28, 2014, while they were up by as much as 47.45% at an intraday high of $265 on February 26, 2014.

Such three stocks are currently up an average of 28.98% in less than 6 months following our October article, while at their peak they were up by an even more impressive average of 48.67%. In case investors still have not booked profits, is it now time to book profits and sell such shares, or could they recapture their previous highs and trade higher?

Equinix

(click to enlarge)

Source: Yahoo Finance

As stated in our October 2013 article, Equinix operates International Business Exchange™ (IBX®) data centers in 32 markets across 15 countries in the Americas, EMEA, and Asia-Pacific. Equinix lures its clients by providing reliability, power density, security and recovery while connecting and powering the digital economy.

Equinix currently has a total market capitalization of $9.1 billion. With average analysts' earnings estimates of $3.57 for the year ending December 2014 and $5.73 for the year ending December 2015, Equinix shares boast respective P/E ratios of 51.55 and 32.06. Meanwhile, such earnings estimates have been revised lower by over 16 cents during the past 90 days.

With about 9.9 million shares short as of March 14, 2014, out of a total float of about 49.2 million shares, Equinix's short ratio (short interest / float) is about 20.1%, below its October level of 28.45%.

Although Equinix's price/book ratio of about 3.7 is still attractive relative to an industry average of about 5.2, while its forward P/E ratios are less expensive than such ratios stood in October 2013 (whereby its 2014 P/E ratio stood then at over 42), Equinix shares could face headwinds due to a reduction in its short ratio (although it is still elevated), in addition to less favorable macro conditions. Such change in macro conditions is led by a continued reduction in Federal Reserve monetary easing (as the Federal Reserve is on track to continue reducing its securities purchases by about $10 billion at every meeting, with potential for interest rate increases in the second quarter of 2015), in addition to rising geopolitical risks in Eastern Europe and elsewhere.

Current price levels, unfavorable macro environment and reduction in short ratio justify booking profits and selling Equinix shares at current levels, looking for a potential lower buying price level. However, we would not recommend shorting Equinix shares, as its short ratio level is still elevated at over 20%, and Equinix's future growth is still expected to be sustained due to the ongoing high growth in digital requirements for digital media, social media and cloud applications.

Keurig Green Mountain, Inc. (Green Mountain Coffee Roasters)

(click to enlarge)

Source: Yahoo Finance

Keurig Green Mountain specializes in the coffeemaker and specialty coffee business. Keurig currently has a total market capitalization of $16 billion. With average analysts' earnings estimates of $3.73 for the year ending September 2014 and $4.04 for the year ending September 2015, Keurig shares boast respective P/E ratios of 29 and 26.8. Meanwhile, such earnings estimates have been revised lower by 7 cents and 33 cents respectively during the past 90 days.

With about 16.7 million shares short as of March 14, 2014, out of a total float of about 125.3 million shares, Keurig's short ratio (short interest / float) is about 13.35%, below its October level of 26.52%.

In our October article, we favored Keurig as we did not believe that patent related growth deceleration will be as pronounced as some analysts had expected. With its prior elevated short ratio, we expected Keurig to retest its previous August 29, 2013 highs of $88.78. As a matter of a fact, since the publication of our article, Keurig not only tested its previous 2013 highs, but also exceeded its September 12, 2011 all time closing highs of $107.99.

Keurig gained momentum following its announcement of February 5, 2014 that The Coca-Cola Company (NYSE:KO) would buy a 10% stake in Keurig for $1.25 billion, representing about 16.7 million shares at an average price of $74.98. In addition, the two companies entered into a 10-year strategic collaboration agreement for the development and introduction of The Coca-Cola Company's global brand portfolio for use in Keurig's forthcoming Keurig Cold™ at-home beverage system.

As a result, Keurig's shares shot higher, also aided by a substantial short squeeze as was evident in its high short ratio at such time. In addition, investors are anticipating that Coca-Cola may ultimately increase its stake in Keurig, and possibly buy out the entire company.

Given Keurig's substantial share price appreciation, in addition to the reduction in its short ratio, we believe current price levels provide a good opportunity to book profits and sell Keurig shares. Furthermore, Keurig announced that it would use proceeds from its Coca-Cola share sale to increase its share repurchase program in the open market in order to offset share dilution. We find such announcement quite puzzling, as in effect, Keurig would have sold shares to Coca-Cola at $74.98, while aiming to buy shares back at higher prices, since the share price of Keurig has remained mostly between $100 and $124 since the announcement of February 5, 2014. We find such share repurchase plan to be counter-productive, unless such plan is activated only upon Keurig's share dropping below the transaction price of $74.98.

As in the case for Equinix, we would not sell Keurig's shares on a short basis, but merely sell existing positions to book profits. Keurig's cold beverage aspirations remain untested, and in case of future success in such venture, Keurig could ultimately increase its revenues beyond current expectations. On the other hand, although consumers have been making homemade hot coffee beverages for over 1000 years, it is yet to be seen if consumers would embrace in mass the idea of homemade cold Coke beverages and other cold beverages...

Tesla Motors Inc.

(click to enlarge)

Source: Yahoo Finance

Unlike Keurig and Equinix, Tesla short ratio has actually increased since our October 2013 article. With about 28.7 million shares short as of March 14, 2014 out of a float of about 84.2 million shares, Tesla's short ratio (short interest / float) stands at about 34.1%. That's a sizable increase from October 2013 levels of about 26.1%.

With average analysts' earnings estimates of $1.80 for the year ending December 2014 and $3.79 for the year ending December 2015, Tesla shares boast respective P/E ratios of 119.1 and 56.6. Meanwhile, such earnings estimates have been revised higher by 30 cents and 90 cents respectively during the past 90 days. Such increases in forward earning expectations have resulted in lower forward P/E ratios for Tesla, although such ratios remain at quite elevated levels.

Tesla shares were boosted higher driven by the short squeeze relating to its high short ratio, in addition to its announcement of February 26, 2014 to build a $5 billion battery "gigafactory". Although such announcement is a positive development as it would lead to an increase in Tesla's electric auto production capabilities, Tesla also announced the issuance of about $1.6 billion in convertible notes to finance the project. Such convertible notes could also lead to some dilution of existing shareholders.

Given the sizeable appreciation in Tesla's shares since October 2013, the possible negative dilutive effect of the issuance of convertible notes and the challenging current macro environment of a reduction in monetary easing, possible higher interest rates in 2015 and renewed global geopolitical risks, we believe current price levels provide a good opportunity for selling Tesla shares and booking profits, possibly looking for a lower priced buying entry point. However, given Tesla's extremely high short ratio of about 34%, and the reduction of its forward P/E ratio, we would certainly refrain from shorting Tesla shares.

Conclusion

As we had previously predicted in October 2013, shares of Tesla, Equinix and Keurig Green Mountain spiked higher led by a short squeeze as evident in their high short ratio. Although such shares have retreated from their February highs, investors who have not yet booked profits may want to consider selling such shares and booking profits at current levels. Meanwhile, we would not favor entering into short positions in such shares due to their strong long term fundamental picture, and in the case of Tesla, due to its extremely high short ratio of about 34%.

Source: Should You Sell 3 Stocks That Spiked, Boosted By Massive Short Interest?